How to Launder Money in the Copper Market (1)

by J. Orlin Grabbe

When I worked at Barclays Metals Derivatives, which
dealt derivative products on the London Metals Exchange
(LME) and arranged structured financing packages for mining
companies, Yasuo Hamanaka--the Sumitomo trader recently
fired for $2.6 billion in "copper-trading losses"--was a well-
known figure.

The LME doesn't deal in gold or silver. Copper and
aluminum are the major metals, but also traded are lead, zinc,
tin, and nickel.

Although Barclays was a trading competitor to
Sumitomo, my business associate John Burns tried to sell
Hamanaka a series of options calculated to avoid a financial
melt-down of his trading portfolio if the price of copper
moved in extremes in either direction. Hamanaka mostly
scoffed at the idea.

Hamanaka would often enter the copper market with
large-size trades, and slam the copper price in this direction or
that. The logic of the pattern of trading would often appear
mystifying, creating paranoid uncertainty as to Sumitomo's
intentions in the minds of its competitors and counterparties.
But it all makes a little more sense when you realize
Hamanaka was not only meeting the considerable copper-
trading needs of the Sumitomo empire, but also conducting a
major money-laundering operation for funds arising from the
Southeast Asian heroin trade. Hamanaka was dealing in white
copper.

The press has lumped this affair into the convenient
category of that of one more rogue trader operating without
proper management supervision. This in itself is nonsense.
First of all, the operating assumption of both the press and the
investigating authorities should be that upper management
knew very well what was going on, as is usually the case.
Second of all, the "trading losses" are related to missing heroin
money. Sumitomo is not about to announce that "a large sum
of heroin money entrusted to our care is missing.". Not a
chance.